Breakup of Countries: No Economic Disaster

The largest and some smaller political parties in Catalonia, one of the richest parts of Spain, want to have a referendum in that region on whether they should secede from the rest of Spain. This is despite the fact that during past several decades the central government of Spain has ceded considerable fiscal and other independence to Catalonia and other regional governments. Those supporting a breakup argue, among other things, that Catalonia is being heavily taxed to help support poorer and less hardworking regions of Spain. The opposition to a breakup both within and outside of Catalonia claims that secession would be illegal under the Spanish constitution, and that it would destroy Spain’s culture.

Spain is not the only country that is experiencing pressure either to breakup, or to become much more decentralized politically. Major parties in Scotland want independence from the rest of the United Kingdom. As a result of this pressure, Scotland and other regions of the UK have received much more autonomy than they had in the past. The independence movement has quieted down in Quebec, but only after Canada established French on an equal footing with English, and after the province of Quebec received other special treatment from the rest of Canada.

The Western and Russian-influenced part of the small country of Georgia is essentially independent in most respects from the rest of Georgia, while Georgia only became independent after the breakup of the Soviet Union into many independent countries. At the close of the nineteenth Taiwan, which had long been part of China, became a colony of Japan until World War II ended. Taiwan was returned to China at that time, but became an independent republic in 1949. China is pressing hard for Taiwan to once again become a province of China, probably with a large degree of autonomy. However, the great majority of Taiwanese prefer the status quo, in part because per capita incomes are so much higher in Taiwan than in Mainland China.

Although emotions usually overflow on the subject of secession and forcible integration, I will not try to evaluate the significance of nationalistic feelings in a region or country. I will instead focus on the economic consequences of a country’s breakup into smaller and largely independent countries. Often stressed is that since larger countries have bigger domestic markets, companies in larger countries can utilize economies of scale in production.

The movement toward free trade agreements and globalization during the past 60 years has enormously reduced the economic advantages of having a larger domestic market to sell goods ands services. Small countries can sell their goods to other countries, both large and small, almost as easily as large countries can sell in their own domestic markets. For example, during the past 30 years the small country of Chile has had the fastest growing economy of Latin America, larger than Brazil and Mexico, the two largest nations of this region. This would not have been possible without the access of Chilean companies to markets in other countries, both in South America and elsewhere. As a result, Chile now exports around 40% of its GDP, compared to a ratio of exports to GDP in the United States of about 13%.

To many in Czechoslovakia, the economic future seemed dim when Czechoslovakia voluntarily split in 1993 into the Czech Republic and the Republic of Slovakia. Similarly, emotions were strong after a destructive war forced Yugoslavia to split into six separate countries. Yet these separate nations are generally doing at least as well economically as did Czechoslovakia and Yugoslavia.

Small countries can do well with small domestic markets by taking advantage of a globalized economy by selling large fractions of its production to consumers and companies in other countries. That is why smaller countries usually export a considerably larger fraction of its production, and import a much bigger share of its consumption, than do larger countries. Size of country was much more important in the past when many countries had high tariffs, and transportation costs were much more important.

Political interest groups tend to be less able in smaller countries in distorting political decision in their favor. This is partly because smaller countries are more homogeneous, so it is harder for one group to exploit another group since the groups are similar. In addition, since smaller nations have less monopoly power in world markets, it is less efficent for them to subsidize domestic companies in order to give these companies an advantage over imports. The greater profits to domestic companies from these subsidies come at the expense of much larger declines in consumer well being.

The growth in the competitiveness of small countries on the global market is in good part responsible at a deeper level for the remarkable growth in the number of countries since 1950 from a little over 100 to almost 200 countries now. And the number of independent countries is still growing.